Developments in Commercial Banking (Part 1 of 3) - ربی - Reserve Bank of India
Developments in Commercial Banking (Part 1 of 3)
1. Introduction
3.1 The revival of industrial activity induced a distinct shift in the operating macroeconomic environment for commercial banks in 2002-03. Along with continued strong capital flows, there was a revival of non-food credit offtake during the year. Commercial banks were able to fund this increased demand from industry without impinging on liquidity conditions by unwinding positions - in both domestic and foreign investments - built up during the previous years of poor credit off-take. Their performance during the year, thus, reflected the mix of a falling interest rate regime and a revival of credit demand. Easy liquidity conditions continued though the first half of 2003-04, driven by strong capital flows.
3.2 The net profits of scheduled commercial banks (SCBs), excluding Regional Rural Banks (RRBs) continued to record substantial growth during 2002-03 over and above the strong performance last year. The return on assets witnessed a marked improvement driven by increases in all major income categories. The spurt in the retail and housing segments boosted both lending and fee incomes. Trading income continued to be strong in consonance with a sustained rally in the Government securities markets, reflecting the softening of the interest rate regime. Interest expenses decelerated sharply with the reduction in deposit rates (Table III.1).
3.3 Banks have been taking pro-active steps to align their risk management processes in line with international best practices. In tandem with the changing face of competition, banks have also undertaken significant initiatives to strengthen their business practices. This included greater product sophistication with increasing leveraging of information technology to deliver value-added services to customers. Besides, there was a greater emphasis on integrated risk management systems to monitor credit, market and operational risks, sharper focus on recovery management including setting up of specialised asset recovery management branches, and on corporate governance practices.
2. Assets and Liabilities of Scheduled Commercial Banks1
3.4 The size of the balance sheet of SCBs recorded slower growth during 2002-03 as compared with that of the previous year, adjusted for merger effects. However, all bank groups, except foreign and new private banks, witnessed double-digit asset growth (Table III.2).
3.5 The size of bank assets of an economy is a measure of financial maturity. The size of bank assets in relation to GDP has important implications for financial development of any economy. The ratio of bank assets to GDP at market prices, at about 70 per cent for India, compares favourably with those of developing countries in Asia and Latin America (Chart III.1).
3.6 The changes in the composition of the balance sheet of SCBs, by and large, reflected the changing macroeconomic environment. Deposits continued to account for about four-fifth of the liabilities. The share of Government paper in total assets continued to climb in response to the rally in the Government securities markets. At the same time, the share of bank credit in total assets also recorded an increase with the revival of industrial activity. This was funded by an unwinding of positions in the call/term money markets, and a drawdown of nostro balances abroad in respect of all bank groups [Appendix Table III.1(A) to III.1(C)]. The increase in profitability in recent years raised the share of reserves and surpluses with banks well above the average recorded during the past five years.
Bank-group wise Position
3.7 The broad overall trends held, more or less, for all bank groups during 2002-03. Reflecting the improving investment climate, the advances portfolio of the public sector banks (PSBs) witnessed a turnaround after several years. A similar phenomenon was evidenced for old private banks as well. New private banks did witness an increase in term deposits, with an accompanying increase in term loans. Foreign banks continued to be active in the Government securities market, although their share in total assets was lower than that of PSBs.
Intra-year Variations2
3.8 The dynamics of the balance sheet flows indicate a stronger growth of credit and investments during 2002-03 (Table III.3). During 2003-04 so far, deposit growth remained on the moderate side and bank credit off-take was subdued.
(Amount in Rs. crore) |
||||||
|
||||||
Indicator |
Outstanding |
Financial Year |
||||
as on March |
Flows (per cent) |
|||||
21, 2003 |
2001-02 |
2002-03 |
||||
|
||||||
1 |
2 |
3 |
4 |
|||
|
||||||
1. |
Aggregate Deposits |
12,80,853 |
14.6 |
16.1 |
||
(a+b) |
(13.4) |
|||||
a) |
Demand Deposits |
1,70,289 |
7.4 |
11.3 |
||
b) |
Time Deposits |
11,10,564 |
15.9 |
16.9 |
||
(13.7) |
||||||
2. |
Bank Credit (a+b) |
7,29,215 |
15.3 |
23.7 |
||
a) |
Food Credit |
49,479 |
35.0 |
-8.3 |
||
b) |
Non-food Credit |
6,79,736 |
13.6 |
26.9 |
||
3. |
Investments in |
|||||
Government Securities |
5,23,417 |
20.9 |
27.3 |
|||
|
||||||
Note |
:Figures in brackets exclude the impact of mergers since May 3, 2002. |
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Source: |
Section 42 (2) returns of commercial banks. |
Deposits
3.9 Deposit mobilisation (net of impact of mergers) by SCBs during 2002-03 was, more or less, in line with the projection of deposit growth, at 14.0 per cent, envisaged in the Monetary and Credit Policy Statement of April 2003 (Appendix Table III.2). The lower deposit growth during 2002-03 partly reflected the deceleration in the monetary base. Time deposits (net of mergers) decelerated reflecting a number of factors, such as, lower accrual of interest in view of the recent softening of deposit rates, and a shift to current accounts in consonance with higher industrial activity. Consequently, demand deposits registered a healthy growth, reflecting the higher non-food credit off-take, fuelled by the revival of industrial production. Deposit expansion remained subdued in 2003-04 so far, primarily reflecting the deceleration in time deposits in response to lower interest rates and impact of the last year's drought. Demand deposits, on the other hand, have remained buoyant during the current year.
Certificates of Deposit (CDs)
3.10 CDs issued by SCBs continued to decline during 2002-03 with the prevalence of easy liquidity conditions - although there was a mild revival in 2003-04 so far (Appendix Table III.3). The discount rates on CDs also continued to soften. The main issuers, as in the past, were mainly banks with a relatively modest retail base, such as, UTI Bank, ICICI Bank, IndusInd Bank, Centurion Bank and Karnataka Bank during 2002-03, and ICICI Bank, UTI Bank, IndusInd Bank, Canara Bank and CitiBank N.A. during 2003-04 so far.
Standing Liquidity Facilities
3.11 The Reserve Bank has been in the process of phasing out sector-specific refinance facilities. The Collateralised Lending Facility (CLF), hitherto available to scheduled commercial banks against the collateral of excess holdings of Government of India dated securities/ Treasury bills (over their investments as part of Statutory Liquidity Ratio (SLR) required to be maintained), has been withdrawn in a phased manner, completely, effective from October 5, 2002. The Export Credit Refinance (ECR) Facility, provided on the basis of banks' eligible outstanding Rupee export credit, both at the pre-shipment and post-shipment stages, remains the only standing facility.
3.12 The apportionment of the standing facilities into normal and back-stop facilities was altered from the initial ratio of two-third to one-third (i.e., 67:33) to one half (i.e., 50:50) each, effective from November 16, 2002. While the normal facility continues to be provided at the Bank Rate, in view of the need to rationalise the multiplicity of rates at which liquidity is injected, effective from April 30, 2003, the following measures were taken in order to increase the efficacy of Liquidity Adjustment Facility (LAF) operations:
- The 'back-stop' interest rate is placed at the reverse repo cut-off rate at which funds were injected earlier during the day in the regular LAF auctions,
- Where no reverse repo bid is accepted as part of LAF auctions, the 'back-stop' interest rate would generally be 2.0 percentage points over the repo cut-off rate of the day under the LAF.
- On the days when no bids for repo or reverse repo auctions are received/ accepted, the 'back-stop' interest rate would be decided by the Reserve Bank on an adhoc basis.
3.13 With effect from April 1, 2002, scheduled banks are provided export credit refinance to the extent of 15.0 per cent of the outstanding export credit eligible for refinance as at the end of the second preceding fortnight. In response to suggestions received from the exporting community (after deregulation of interest rates on post-shipment Rupee export credit beyond 90 days and up to 180 days), with effect from May 1, 2003, the Reserve Bank announced that the refinance facility would continue to be extended to eligible export credit remaining outstanding under post-shipment Rupee credit beyond 90 days and up to 180 days.
3.14 There was a substantial increase in aggregate export credit, consistent with high export growth during 2002-03. The export credit refinance limit, however, declined steadily during 2002-03 (and 2003-04 so far) as a large part of the drawals were in the form of pre-shipment credit in foreign currency and export bills rediscounted which are not eligible for refinance (Appendix Table III.4). The average daily utilisation of the export credit refinance facility picked up in May 2002 (48 per cent of the limit as on May 17, 2002) on account of a temporary hardening of interest rates arising out of border tensions but thereafter declined to negligible levels with the return of easy liquidity conditions. The average daily utilisation of liquidity support under the CLF provided to SCBs ranged between Rs.30 crore and Rs.175 crore during April-May 2002 and was virtually vacated when it was withdrawn completely on October 5, 2002.
Bank Credit
3.15 Bank credit (net of impact of mergers) increased during 2002-03. There was, however, a change in the composition of the credit off-take. Food credit recorded a drop on account of lower procurement operations during the year. Non-food credit, on the other hand, registered a pick-up, reflecting a turnaround in the industrial climate, especially during the latter half of the year. Besides, there was a sharp increase in foreign currency credit demand reflecting relatively lower cost of funds to the borrower vis-à-vis Rupee loans. During 2003-04 so far, bank credit growth remained moderate. Food credit contracted owing to lower procurement and higher off-take. Non-food credit off-take remained relatively subdued amidst buoyancy in industry reflecting, inter alia, increased recourse by corporates to internal sources of financing as well as external commercial borrowings. More recently, i.e., since September 2003, some signs of a pick-up in non-food credit are clearly discernible.
Other Investments
3.16 Besides conventional credit, banks have been investing significantly in non-SLR investments in the form of commercial paper, shares, bonds, and debentures issued by the private corporate sector and public sector undertakings (PSUs) (Table III.4). The sharp increase in such investments during 2002-03 reflects partly the impact of merger effects. In particular, there was a substantial drop in investments in CP, reflecting a decline in issuances during the latter half of the year. Non- SLR investments showed some decline in 2003-04 primarily on account of a fall in the holdings of bonds and debentures of the private corporate sector.
Note: |
Data are based on statutory Section 42 (2) returns submitted by scheduled commercial banks. |
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Figures in brackets are percentages to the total. Constituents, may not add to total due to rounding off of figures. |
Commercial Paper (CP)
3.17 Banks' investments in CPs issued by the corporates declined during 2002-03, especially during the second half of the year. This reflected, in part, a fall in primary issuances by manufacturing companies having access to sub-PLR lending etc. The principal investors of CP included the following banks, viz., State Bank of India, HDFC Bank, Union Bank of India, Punjab National Bank and Central Bank of India. The top five issuers of CP were EXIM Bank, IDBI, Indian Petroleum Corporation Ltd. (IPCL), the erstwhile ICICI Ltd. and HDFC. The discount rate on CP invested by SCB’s declined steadily from 7.4-10.3 per cent in March 2002 to 6.0-7.8 per cent by March 2003, and further to 4.7-6.5 per cent by September 2003. The spread of the weighted average discount rate (WADR) between the prime-rated and medium-rated companies widened to 156 basis points by end-November 2002 from 89 basis points in mid-April 2002, but narrowed to 59 basis points by end-March 2003 and thereafter to 65 basis points as at end-September 2003.
Commercial Bills
3.18 The market for bills rediscounting recorded a general decline in activity during 2002-03. However, during 2003-04 so far, it showed a marked increase from an average of Rs.281 crore during the first quarter of 2003-04 to Rs. 567 crore during the following quarter. The share of SIDBI, at 78.2 per cent of the total transactions during 2002-03 and 84.5 per cent of total transactions during the first half of 2003-04, continued to be substantial.
Forward Rate Agreements (FRAs) / Interest Rate Swaps (IRS)
3.19 There was a sharp increase in volume in the markets for futures products, such as, FRAs and IRS during 2002-03. While there was a spurt in both the number of contracts and the outstanding notional principal amount, participation in the market continues to remain restricted mainly to select foreign and private sector banks and a primary dealer. In a majority of these contracts, the NSE-Mumbai Inter-Bank Offered Rate (MIBOR) and Mumbai Inter-Bank Forward Offered Rate (MIFOR) were used as the benchmark rates. The other benchmark rates used include the 1-year Government of India security secondary market yield and primary cut-off yield on 364-day Treasury Bills. FRA/ IRS transactions continued to increase sharply to 12,951 contracts at Rs.3,33,736 crore as on September 19, 2003.
Sectoral Deployment of Gross Bank Credit
3.20 The gross bank credit of select SCBs (covering major banks accounting for 85-90 per cent of bank credit of all SCBs) recorded marginally higher growth during 2002-03 as compared with the previous year (Table III.5 and Appendix Table III.5). There was a sharp acceleration in non-food credit, driven mainly by an acceleration in advances to industry (medium and large) and housing.
3.21 Fiscal 2002-03 witnessed a sharp pickup in housing loans, which witnessed a quantum rise to 6.1 per cent of non-food gross bank credit as at end-March 2003, up from 4.6 per cent as at end-March 2002, reflecting several policy initiatives in this regard. In fact, banks have consistently exceeded the targets prescribed for providing housing loans during 2001-02 and 2002-03 (Table III.6).3
Changing Pattern of Export Financing
3.22 The share of export credit in net bank credit remained at a level of 8.0 per cent as in the previous year, notwithstanding higher export growth during the year (Chart III.2). This might be due to the changes in the financing pattern of exports brought about by the liberalised policy regime, softening of domestic and global interest rates and availability of alternative sources of finance at competitive rates.
(Amount in Rs. crore) |
|||
|
|||
Item |
April-March |
||
2001-02 |
2002-03 |
||
|
|||
1 |
2 |
3 |
|
|
|||
Minimum Prescribed |
5,046 |
8,574 |
|
Allocation |
(31.1) |
(69.9) |
|
Disbursements |
14,746 |
33,841 |
|
(51.9) |
(129.5) |
||
|
|||
Notes : |
1. Data are provisional. |
||
2. Figures in brackets indicate percentage |
|||
changes over the previous year. |
Industry-wise Deployment of Credit
3.23 The increase in industrial credit was, by and large, spread across all sectors (Chart III.3 and Appendix Table III.6). Industry-wise, significant credit growth was observed in electricity, cotton textiles, infrastructure and iron and steel. However, four out of 26 industries, i.e., coal, engineering, tobacco and tobacco products and sugar recorded a decline in credit during 2002-03.
|
||||||
Note: |
Data are provisional and relate to select scheduled commercial banks which account for 85-90 per cent of bank |
|||||
Credit of all scheduled commercial banks. |
Bank Credit to Sick/Weak Industries
3.24 There has been a decline in the number of sick-SSI and non-SSI (sick / weak) industrial units financed by SCBs in recent years (Appendix Table III.7). The quantum of bank loans locked up in sick/weak industries increased marginally to Rs.26,065 crore as at end-March 2002.
Lending to Sensitive Sectors
3.25 The overall exposure of SCBs to sensitive sectors comprising capital market, real estate and commodities, underwent a compositional shift during 2002-03 (Table III.7 and Appendix Table III.8). There was a jump in housing finance - so much so that the overall exposure to sensitive sectors of most bank groups has gone up. PSBs continued to account for about two-thirds of the total exposure of SCBs to sensitive sectors.
3.26 Most bank groups, excluding the foreign bank category, unwound their exposure to the capital market during 2002-03, partly on account of the subdued performance of the capital market with limited activity being witnessed during 2002-03 and partly on account of the new growth driver: housing finance. Most commercial banks are engaged in offering retail credit for housing on highly competitive prices and customer-friendly terms, supported by strong marketing efforts to enhance their customer appeal. Consequently, real estate lending by most bank groups experienced moderate to significant increases, a decline being evidenced only in case of old private banks who, in fact, experienced a cutback in their overall lending to sensitive sectors. Exposure to commodities was on the lower side for most bank groups, with declines being evident for the State Bank group, foreign banks and old private banks.
Credit-Deposit Ratio
3.27 According to the data available from the Basic Statistical Returns (BSR), the credit-deposit (C-D) ratio of SCBs as at end-March 2002 (as per utilisation) was 58.4 per cent (Appendix Table III.9) The total flow of resources, as reflected in the credit plus investment to deposit (IC-D) ratio showed an increase (as per utilisation) over the last few years. The same trend has been observed in all the regions, except the western region. The western region showed a decline as at end-March 2002 as compared with end-March 2001 mainly due to a decline in the IC-D ratio of Maharashtra, which may be partly attributed to the impact of the merger.
Credit to Government
3.28 Commercial banks continued to invest heavily in Government paper, as the sustained softening of interest rates continued to fuel a rally in gilt prices. As a result, commercial bank SLR investments further increased to 38.5 per cent of their net demand and time liabilities (NDTL) as at end-March 2003 from 36.0 per cent as at end-March 2002, much above the stipulated minimum norm of 25.0 per cent. This climbed to over 40 per cent of NDTL by end-September 2003, amidst surplus liquidity in financial markets.
Role of Banks as Authorised Dealers (ADs)
3.29 A distinctive feature of the 1990s has been the growing influence of capital flows on the operations of the monetary and banking system (Box III.1). Not only has the liberalisation of the external sector significantly enhanced the quantum of funds channeled between residents and nonresidents manifold, but increasingly, the relaxation of balance sheet restrictions in respect of foreign exchange operations has transformed banks into active participants in the foreign exchange markets. Switches in capital flows, therefore, now directly affect bank liquidity. Second, the resultant impact on interest rates has been impacting bank profitability. Third, given the differential between domestic and international interest rates, the allocation between domestic and foreign assets also influences bank profitability, especially in view of the increasing liberalisation of banks' foreign exchange operations. The turnover in the foreign exchange business of banks increased by an annual average of about 4 per cent, in US dollar terms, between 1997-98 and 2002-03. While inter-bank transactions still continue to account for around 80 per cent of the total turnover, the merchant banking business of the ADs has grown much faster in recent years (Table III.8).
International Banking Statistics
3.30 Monitoring of the cross-border flow of funds has assumed critical importance in view of the growing liberalisation of the external sector. The Reserve Bank now compiles and disseminates international banking statistics (IBS) on the lines of the reporting system devised by the Bank for International Settlements (BIS). Such statistics provide an understanding of the total magnitude of international assets and liabilities of the banking system and their composition, mainly in terms of maturity, currency composition and country of residence. International assets / liabilities cover claims / liabilities of reporting banks with / toward nonresidents in any currency and residents only in foreign currency.
3.31 The locational banking statistics (LBS) provide the gross position of international assets and international liabilities of all banking offices located in India. They report exclusively banks' international transactions including the transactions with any of their own branches / subsidiaries /joint ventures located outside India.
3.32 International liabilities of banks recorded a sharp increase during both 2001-02 and 2002-03 partly driven by the accretion to non-resident deposits and their large-scale foreign currency borrowings (Table III.9). International liabilities were predominantly denominated in either US dollars or Indian Rupees, given the large size of Rupee non-resident deposits.
3.33 Banks' international assets, as at end-March 2003, on the other hand, remained roughly the same as at end-March 2002 (Table III.10). There was, however, a dramatic change in the composition of banks' international assets, with a large scale substitution of nostro balances, including term deposits with non-resident banks, with foreign currency loans to residents, reflecting higher domestic demand for relatively cheaper foreign currency loans. The bulk of the international assets continued to be held in US dollars, although the share of Euro persisted to record a steady rise.
3.34 The consolidated banking statistics (CBS) provide comprehensive and consistent quarterly data on banks' financial claims on other countries, both on immediate borrower basis for providing a measure of country transfer risk, and on ultimate risk basis for assessing country credit risk exposures of the domestic banking system. The immediate country risk refers to the country where the original risk lies and the ultimate country risk relates to the country where the final risk lies. The consolidated claims of banks, based on immediate country risk, as at end-March 2003 were mainly concentrated on the US, Hong Kong and the UK (Table III.11).
3.35 The distribution of consolidated international claims of banks on various countries, other than India, according to residual maturity reveals that banks continue to prefer to invest/lend for short-term purposes although there was a slight shift to longer-term maturities during the year (Table III.12).
3.36 The contours of the management of liquidity by commercial banks during 2002-03 were different from that of 2001-02, essentially because of a revival of credit demand with a turnaround in industrial activity. The analysis of banks' liquidity management is facilitated by the compilation of the Commercial Bank Survey following the recommendations of the Working Group on Money Supply: Analytics and Methodology of Compilation (Chairman: Dr. Y. V. Reddy) (Box III.2, Table III.13 and Appendix Table III.10).
3.37 Portfolio management by banks, reinforced by the Reserve Bank's simultaneous operations in the foreign exchange and Government securities markets, allowed a smooth reallocation of domestic and foreign asset flows during 2002-03 (Chart III.4). Besides, the announcement of indicative calendars for the auctions of the Central Government dated securities as well as Treasury bills during 2002-03 provided greater manoeuvrability to banks to plan their investments and manage their liquidity4. The availability of surplus liquidity with the banking system ensured the continuation of a regime of softening interest rates, even while funding the higher demand for credit (Chart III.5). The higher credit off-take during 2002-03 was, by and large, funded by a redeployment of assets - essentially a liquidation of both domestic and foreign investments built up in the previous phase of easy liquidity so that there was no need for banks to either canvass for deposits or cut down their exposures in gilts - without putting immediate pressure on interest rates. The share of deposit mobilisation in the sources of funds declined to 91.7 per cent, net of merger effects, during 2002-03 from 96.6 per cent during the previous year. The resultant gap was funded by a mix of higher call/term funding from financial institutions, overseas foreign currency borrowings and drawdown of foreign currency assets. In contrast to 2001-02, when banks parked a sizeable portion of the liquidity emanating from foreign currency flows in foreign assets because of a lack of domestic demand, they preferred, during 2002-03, to liquidate such investments to advance loans in foreign currency to domestic corporates.
Chart III.4: Movements in Net Demestic Assets and Net Foreign Currency Assets of the Banking Sector
(Rs. crore) |
||||||||||||
|
||||||||||||
Variable |
Outstanding |
2002-03 |
2001-02 |
|||||||||
as on |
||||||||||||
March 21, |
Q4 |
Q3 |
Q2 |
Q1 |
Q4 |
Q3 |
Q2 |
Q1 |
||||
|
||||||||||||
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
|||
|
||||||||||||
I. |
Components |
|||||||||||
Aggregate Deposits of Residents 11,58,942 |
24,073 |
37,484 |
32,201 |
52,675 |
32,122 |
29,675 |
20,856 |
53,337 |
||||
Demand Deposits |
1,70,289 |
5,405 |
11,654 |
-4,535 |
4,717 |
4,412 |
10,074 |
-9,382 |
5,392 |
|||
Time Deposits of Residents |
9,88,653 |
18,668 |
25,829 |
36,735 |
47,958 |
27,710 |
19,601 |
30,237 |
47,945 |
|||
Call/Term Funding from |
||||||||||||
Financial Institutions |
12,638 |
2,142 |
227 |
792 |
6,448 |
-1,471 |
409 |
1,865 |
-341 |
|||
II. |
Sources |
|||||||||||
Credit to the Government |
5,23,417 |
23,798 |
22,680 |
18,716 |
47,047 |
12,049 |
13,791 |
21,088 |
24,213 |
|||
Credit to the Commercial Sector |
8,46,494 |
27,881 |
39,481 |
20,322 |
22,825 |
33,676 |
31,320 |
11,217 |
9,349 |
|||
Food Credit |
49,479 |
-2,468 |
-1,415 |
-7,645 |
7,030 |
1,702 |
4,015 |
-2,079 |
10,349 |
|||
Non-food Credit |
6,35,192 |
39,439 |
32,541 |
19,945 |
7,522 |
28,347 |
25,673 |
12,649 |
-2,367 |
|||
Net Credit to Primary Dealers |
4,093 |
-5,886 |
959 |
5,817 |
2,874 |
526 |
115 |
-401 |
221 |
|||
Investments in Other Approved Securities |
24,129 |
-306 |
-965 |
-459 |
-1,233 |
-644 |
-1,452 |
62 |
-997 |
|||
Other Investments (in non-SLR Securities) |
1,33,601 |
-2,898 |
8,361 |
2,664 |
6,633 |
3,745 |
2,970 |
986 |
2,143 |
|||
Net Foreign Currency Assets |
||||||||||||
of Commercial Banks |
-68,366 |
-8,820 |
-9,027 |
-15,136 |
2,748 |
-2,670 |
-3,544 |
-941 |
4,952 |
|||
Foreign Currency Assets |
31,082 |
-5,345 |
-7,955 |
-14,412 |
4,718 |
-3,483 |
-1,996 |
2,023 |
5,886 |
|||
Non-resident Foreign Currency |
||||||||||||
Repatriable Fixed Deposits |
92,240 |
-703 |
-230 |
669 |
1,655 |
475 |
1,425 |
2,018 |
835 |
|||
Overseas Foreign Currency Borrowings |
7,208 |
4,178 |
1,302 |
55 |
315 |
-1,288 |
123 |
946 |
99 |
|||
Net Bank Reserves |
65,823 |
-5,700 |
-1,619 |
11,055 |
-2,943 |
-3,929 |
-1,277 |
-7,373 |
16,304 |
|||
Capital Account |
86,541 |
1,625 |
-1,815 |
-742 |
15,152 |
1,150 |
958 |
2,297 |
4,403 |
|||
Memo: |
||||||||||||
Release of resources through changes in CRR |
- |
0 |
3,500 |
0 |
6,500 |
0 |
8,000 |
0 |
4,500 |
|||
Net open market sales to commercial banks |
- |
7,338 |
12,803 |
13,228 |
3,131 |
0 |
1,904 |
9,614 |
4,106 |
|||
|
||||||||||||
Notes: |
1. Q1 refers to the quarter ending June, and so on. |
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2. Deposits have been adjusted for the full impact of the mergers while credit has been adjusted for the initial impact of the same since May 3, 2002. |
3.38 The portfolio allocation of banks' foreign currencies has several macro and monetary implications. If banks choose to park balances abroad, the entire transaction set is money -and output-neutral. If banks advance loans in foreign currency to residents, the transaction set is money-neutral because funds are still deployed abroad but there is an output effect arising out of the funds received by domestic industry. If banks convert their foreign currencies with the Reserve Bank in Rupees and advance loans to domestic corporates, there is a monetary as well as an output effect. If domestic corporates convert their foreign currency loans to meet domestic expenditure, the monetary impact depends on whether the banking system is able to meet this demand through a substitution within its existing portfolio or whether it accesses the Reserve Bank for Rupee resources. Since such exchange rate risk is borne by the domestic corporates, the Mid-term Review of the Monetary and Credit Policy of November 2003, requires banks to extend foreign currency loans above US $ 10 million only on the basis of a well-laid out policy by each bank to ensure hedging, except in case of exports receivables and for meeting foreign exchange expenditures.
3.39 Fiscal 2002-03 commenced with the usual ample liquidity conditions during April, thereby unwinding the end-of-the-year tightening in the market for funds. This was counter-balanced by the commencement of the market borrowing programme of the Central Government, reinforced by the Reserve Bank's open market (including repo) purchases. Liquidity conditions, in fact, tightened in the first half of May, as the Government's market borrowing programme progressed and with a substantial pick up in food credit. This led to a withdrawal of banks from LAF auctions and a drawdown of their balances with the Reserve Bank. Furthermore, border tensions created market uncertainty, necessitating a series of private placements of the Government securities with the Reserve Bank during the second half of May. The reduction of CRR by 50 basis points, reinforced by Government bond redemptions, augmented liquidity conditions in June, facilitating banks' subscriptions in the auctions of Government securities and advance tax outflows. The repo rate reduction of 25 basis points on June 27 restored sentiments and regenerated interest in the Government securities market.
3.40 There was a sharp increase in non-food credit off-take during the remaining part of the year, engendered by the turnaround in industrial activity. Besides the liquidity injected by a CRR cut of 25 basis points in November, this was, by and large, funded by a deployment of assets through the following means, viz., (a) a decline in food credit, as a result of drought conditions, (b) a drawdown of nostro balances (especially to meet foreign currency credit demand), (c) reduced subscriptions in the LAF repo auctions, and (d) liquidation of non-SLR investments. As a result, ample liquidity conditions continued to prevail, notwithstanding a few stray episodes of temporary tightness, viz., around mid-November (gilt auction outflows before transiting to a higher average daily CRR maintenance), in mid-January (sizeable open market sales) and the latter part of February (on-tap sales of State Governments loans). The impact of capital flows on bank liquidity was neutralised as the Reserve Bank continued to counterbalance its purchases of foreign currency with open market sales of Government securities even as the tempo of Government's market borrowing moderated. The ample liquidity facilitated a smooth phasing out of the collateralised lending support facility to banks by the Reserve Bank effective from the fortnight beginning October 5, 2002. The year 2003-04 so far was also characterised by easy liquidity emanating predominantly from a continued upsurge in capital inflows which more than counterbalanced the deceleration in commercial banks’ domestic deposit mobilisation and relatively moderate credit demand. A reduction in the CRR by 25 basis points to 4.5 per cent of NDTL in June 2003 also released additional funds to the banking system. Mirroring easy liquidity conditions, the repo rate was cut by 50 basis points to 4.5 per cent in August 2003. As a consequence, commercial banks’ investments in the Government securities remained strong through primary auctions and open market (including repo) operations.